Bubbles occur fairly often in individual stocks and small markets but it's rare when they occur in bigger markets. They most dramatic bubble I've experienced was in the Nasdaq in 1999-2000. It was classic hysteria. While much money was made, much was eventually lost.
The current bubble in bitcoin has already surpassed the Nasdaq bubble in some ways and it has developed in much the same way. The interest among people that haven't previously invested much is intense and there is chatter about it in gatherings where investment portfolios are rarely discussed.
There are quite a few Bitcoin True Believers that snarl at the word "bubble" but this obviously is one. The emotions and volatility tell us that this is something unusual. Just because it's a bubble doesn't mean you should sell it, short it or avoid it. The nature of bubbles is to last far longer than people think is reasonable. Bitcoin may remain in a frenzy for months or years but eventually it will go through a very nasty correction.
All markets go through cycles. It's inevitable, which is why I can say with certainty that bitcoin will be cut in half, or more, at some point. I don't know when or from what level but it will happen.
The best way to trade bitcoin is to study other bubbles. Bitcoin is unique because it isn't readily shortable, it has limited supple, fundamentals are murky at best and the markets it trades in are unreliable and illiquid at times. It's intangible in much the same way many internet stocks were back in 2000.
Here is a chart of the Nasdaq bubble back in 1999-2000.
Key things to note:
- The run-up was extremely consistent with low volatility.
- Intraday volatility steadily increased as the top formed.
- The first major dip was bought, and the highs were retested.
- The second major dip created a rush for the exits when support was breached. This is key. The technicians clearly had sell stops set at that key technical level.
- Once the uptrend was broken, the bounces were sold hard.
- Panic selling ensued well after the uptrend was broken.
I suspect that bitcoin is in the phase now where intraday volatility is becoming extreme. That can continue for a while, but it suggests that a significant downward move is coming soon.
Bitcoin is unique, and I expect it to remain a very volatility trading vehicle for quite a while. Just make sure you appreciate that it trades in a bubble and that it's going to cause some tremendous losses at some point.
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